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Tuesday, August 22, 2006

Back to Basics

By William Trent, CFA of Stock Market Beat

Basic Materials stocks continue to appear well positioned. According to the latest Value Line Investment Survey:

The Chemical/Diversified Industry continues to fare relatively well, with most companies on track to generate higher earnings in 2006. Economic conditions remain largely favorable, with the industrial sector extending its record of expansion. One common trait shared by most of these companies is that they continue to battle the headwinds of higher raw material and energy costs.

Manufacturers have made every effort to pass increased expenses onto their customers by raising selling prices, but commodity price changes continue to outpace their efforts. As a result, although most of the companies here will report margin improvement in 2006, they largely remain below their best levels of prior years.

Still, the stocks continue to show improving relative price and earnings performance, with the group’s Timeliness rank moving up a few notches into the top half of the Value Line universe. Readers will find a number of issues here that offer attractive price growth potential, both for the coming six to 12 months and out to 2009-2011.

Our Watch List exposure to the chemical industry is through South Africa’s Sasol. Their technology to convert coal into oil was recently written up in the Charleston Gazette.

For decades, scientists have known how to convert coal into a liquid that can be refined into gasoline or diesel fuel. But everyone thought the process was too expensive to be practical.

The exception was South Africa, a one-time pariah state that had huge reserves of coal and, thanks to anti-apartheid sanctions, limited access to foreign oil. Sasol Ltd., a partly state-owned company, built several coal-to-liquids plants, including the ones at Secunda, and became the world’s leading purveyor of coal-to-liquids technology.

Now, oil prices are above $70 a barrel, and Sasol has emerged as the key player in the world’s latest alternative-energy boom.

Turning to metals, despite Teck-Cominco dropping out of the race, there is still a two-way battle to acquire Inco. Depending on your perspective, the recent acquisition frenzy across the board in the materials and energy sectors represents either a market top or a signal that shares are undervalued.

Many experts believe gold will hold above $600 per ounce. If so, you may want to look at MineWeb’s list of the world’s top gold stocks. But what do the technicals say?

Plus, we learn that Dell’s battery recall may be positive news for zinc miners.